For many of us, 2020 may well go down as one of the worst years we have ever lived through.
Putting COVID in perspective, it is humbling for us as humans to witness how little control we have over many things such as a pandemic. Fortunately, our younger cohort appears to be more resilient against this virus which bodes well for the future. And of course, we cannot help but marvel and be grateful for the wonders of modern science that was able to develop what appear to be several effective vaccines in a matter of months.
So as we end 2020, I believe there are numerous reasons why we can and should feel more positive about next year.
One of the most important things we can feel encouraged about for 2021 is the positive implications for a COVID vaccine. From the perspective of saving lives, relieving burden on our healthcare system, our emotional wellbeing, and some return to “normalcy” in our lives, the vaccines can’t come fast enough.
But there are broader implications for the vaccine including what we expect should be a very positive boost for our economy in 2021.
Successful vaccination of large portions of our populace should lead to transmission and case reductions and gradual return to a more normal way of life. This would be very positive for the 35-40% of our economy that is dependent on physical human involvement such as restaurants, travel, hotel, retail and leisure activities.
Recovery in these industries will add thrust to the economic recovery that began in late spring. We expect there should be a gradual step up in GDP growth each quarter in 2021 as a result of increased hiring and consumer spending, with full year GDP growth now expected to be in the range of +5%.
Further recovery in the U.S. economy has positive implications for the stock market because it should result in a material increase in corporate profits which are the primary driver of stock prices. We believe corporate profits should grow at an above average rate of about 18% in 2021 and 12% in 2022.
With rising GDP and prospects for several years of earnings growth ahead, we believe the outlook for stocks and stock returns remains positive.
An important part of what we do as financial planners is advising clients on the best investment strategies to meet their financial goals. I believe we and our clients can look forward to 2021 with increased confidence and positivity with respect to the potential for asset growth supported by the improving outlook for our economy and corporate profits. That said, we cannot forget or downplay the importance of keeping events like COVID in perspective. As planners, we know unforeseen events will happen and we have to “plan” for them.
Sound financial planning addresses these risks through realistic planning assumptions (including assumed market volatility) and investment strategies that provide both the growth necessary to achieve long-term goals and risk mitigation through asset class diversification.
Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.